Question: Make a model of the loanable funds market in a closed economy.
1) Describe the effect of a raise in the Government Budget Deficit on the rate of interest and the level of private investment. Recognize the crowding out effect in this context.
2) Assume that the investment is perfectly interest inelastic. Describe the crowding out effect for a raise in the government budget deficit.
3) If saving is perfectly inelastic then determine the crowding out effect for a raise in the government budget deficit.